Tata Consultancy Services:Growth outperformance to continue Toning down of expectations post 3Q, growth and valuation comfort provide a favourable backdrop: Nomura Research

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Action: Still likely to outgrow peers, reiterate Buy

We believe weak 3Q results and soft 4QF guidance are already in the price,

with TCS underperforming INFO/WPRO by 11/13% YTD and its one-year

forward P/E premium vs INFO narrowing to just 10% (vs ~25% a year back).

Despite building cross-currency impacts and incorporating the weak 4QF

guidance, we believe TCS will still outperform INFO/WPRO on both revenue

(13% CAGR vs 11/9.5% at INFO/WPRO) and EPS growth (14% CAGR vs

11/10% at INFO/WPRO) over FY15-17F. We continue to find TCS better

positioned on growth given its higher contribution from growing service lines

IMS/BPO/Engineering services/Testing, a broader geographical footprint and

no visible portfolio gaps. We continue to prefer TCS over INFO/WPRO and

value it at a ~15% premium to INFO. HCLT remains our top Buy in tier-1 IT.

Catalyst: Progressively improving demand traction into FY16F

4QF: Revenue and margins likely to be flattish; FY16F guidance key

For 4QF, we expect USD revenue growth of 0.3% q-q (constant currency

growth of 2.5%) and 30bps q-q increase in EBIT margin to 27.3%.

Management guidance on FY16F revenue growth, strength of demand in

1HFY16F and outlook on BFSI/Retail are key to stock performance going

forward, we think. Like INFO, we expect wage hikes at TCS to be moderate in

FY16F and expect TCS to retain its EBIT margin band of 26-28%.

EPS cut by ~2% on CC impacts; TP rises to INR2,845 on roll forward

We continue to expect 14-15% constant currency revenue growth over FY15-

17F, but our USD growth numbers are lower on cross currency impacts and a

weak 4QF. Our FY16/17F EPS estimates are consequently lower by 2% each.

We look for a 13% CAGR in USD revenue and a 14% CAGR in EPS over

FY15-17F. Our TP rises to INR2,845 (vs 2,800 earlier) on roll-forward, and is

based on 20x FY17F EPS of INR142.3.